Search results

1 – 10 of over 1000
Article
Publication date: 19 April 2022

Seung Uk Choi, Kun Chang Lee and Hyung Jong Na

The paper aims to estimate abnormal audit fees more precisely than the traditional audit fee model by applying an artificial intelligence (AI) method.

Abstract

Purpose

The paper aims to estimate abnormal audit fees more precisely than the traditional audit fee model by applying an artificial intelligence (AI) method.

Design/methodology/approach

The AI technique employed in this paper is the deep neural network (DNN) model, which has been successfully applied to a wide variety of decision-making tasks. The authors examine the ability of the classic ordinary least squares (OLS) and the DNN models to describe the effects of abnormal audit fees on accounting quality based on recent research that demonstrates a systematic link between accruals-based earnings management and abnormal audit fees. Thus, the authors seek to imply that their new method provides a more precise estimate of abnormal audit fees.

Findings

The findings indicate that abnormal audit fees projected using the DNN model are substantially more accurate than those estimated using the classic OLS model in terms of their association with earnings management. Specifically, when abnormal audit fees predicted using the DNN rather than the OLS are incorporated in the accruals-based earnings management model, the adjusted R2s are larger. Additionally, the DNN-estimated coefficient of abnormal audit fees is more favorably associated to earnings management than the classic OLS-estimated coefficient. Additionally, the authors demonstrate that the DNN outperforms OLS in terms of explanatory power in a negative discretionary accruals subsample and a Big 4 auditor subsample. Finally, abnormal audit fees projected using the DNN method provide a better explanation for audit hours than those estimated using the OLS model.

Originality/value

This is the first approach that utilized a machine learning technology to estimate abnormal audit fees. Because more precise measurement yields more credible research results, the findings of this study imply a significant advancement in calculating unusually higher audit fees.

Details

Management Decision, vol. 60 no. 12
Type: Research Article
ISSN: 0025-1747

Keywords

Article
Publication date: 1 July 2011

Tang Yuejun

The purpose of this paper is to empirically analyze the impacts of motivation for avoiding loss and actual abnormal audit fees on management behaviors of audit opinion shopping.

Abstract

Purpose

The purpose of this paper is to empirically analyze the impacts of motivation for avoiding loss and actual abnormal audit fees on management behaviors of audit opinion shopping.

Design/methodology/approach

Using empirical research methods, this study employs regressive models and moderating effect models with data from Chinese listed companies from 2001 to 2008.

Findings

By analyzing the empirical data, it is found that strong motivation for avoiding loss has a certain moderating effect on the relationship between abnormal audit fees and audit opinion shopping; abnormal descent of audit fees significantly increases both the likelihood of receiving modified audit opinions of annual financial reports and that of the improvement of audit opinions; listed companies reporting consecutive losses in the last two years have a higher likelihood of an improvement in unfavorable audit opinions because of stronger motivation for avoiding loss and audit opinion shopping of management; and strong motivation for avoiding loss has a significant moderating effect on the relationship between abnormal increase of audit fees and audit opinion shopping.

Practical implications

This study has a significant practical implication for market supervisors, small and medium investors.

Originality/value

The paper classifies abnormal audit fees into abnormal increase and descent of audit fees, and audit opinions differences into the improvement and deterioration of audit opinions, and further empirically analyzes and verifies the moderating effect of motivation for avoiding loss on the relationship between abnormal audit fees and audit opinion shopping.

Details

China Finance Review International, vol. 1 no. 3
Type: Research Article
ISSN: 2044-1398

Keywords

Article
Publication date: 3 September 2018

Mohammad Alhadab

This paper aims to examine the relationship between abnormal audit fees and accrual-based and real-based earnings management by using a sample of 1,055 UK firm-year…

1109

Abstract

Purpose

This paper aims to examine the relationship between abnormal audit fees and accrual-based and real-based earnings management by using a sample of 1,055 UK firm-year observations from 2006 to 2015.

Design/methodology/approach

Linear regression was used to test the hypothetical relation between abnormal audit fees and accrual and real earnings management. Following prior research, several proxies have been used to measure abnormal audit fees, accrual earnings management and real earnings management.

Findings

Abnormal audit fees were negatively associated with real earnings management. A higher level of abnormal audit fees was the major driver of enhanced audit quality, in turn reducing managers’ flexibility to use real earnings management and to manipulate reported earnings. Abnormal audit fees were found to be negatively associated with abnormal discretionary expenses, abnormal production costs and the aggregated measure of real earnings management.

Practical implications

This paper outlines the importance of considering any abnormal audit fees paid to audit firms. It is expected that the abnormal audit fees might compromise auditor independence and lead to a higher level of earnings management. However, the findings of this paper provide a new insight to many interested parties, e.g. regulators, audit firms, investors and creditors, that abnormal audit fees are associated with higher audit quality and higher financial reporting quality in the UK. Regulators in the meanwhile should reform the audit market by, e.g. revising the types of non-audit services that are provided for the same client, setting a cap on the maximum fees that can charged by auditors and monitoring earnings management practices. Audit firms should take into consideration that any charged abnormal level of audit fees may have a direct impact on audit quality.

Originality/value

This is the first study to examine the impact of abnormal audit fees on accruals and real earnings management after major regulatory changes that took place in the UK. These major changes are the adoption of the International Financial Reporting Standards in 2005 and the new legislation concerning the ethical standards issued by the UK Audit Practice Board in 2004. These two major changes are expected to have a direct impact on both earnings management and audit fees, notably for the largest public listed firms. This study also focuses on one of the very developed and attractive stock markets in the world, the UK FTSE 350 stock index, that incorporates that largest 350 public firms.

Details

Journal of Financial Reporting and Accounting, vol. 16 no. 3
Type: Research Article
ISSN: 1985-2517

Keywords

Article
Publication date: 19 October 2022

Zhong-Lu Teng and Jin Han

This study aims to provide evidence on the association between abnormal tone and audit fees, as well as between abnormal tone and audit report lag.

Abstract

Purpose

This study aims to provide evidence on the association between abnormal tone and audit fees, as well as between abnormal tone and audit report lag.

Design/methodology/approach

This study uses a fixed-effects model to examine the relationship between abnormal positive tone and audit engagement (audit fees and audit report lag). Following Blanco et al., the authors used propensity score matching to examine the robustness of the findings.

Findings

Abnormal positive tone affects the audit process. An abnormal positive tone in annual reports is associated with greater audit effort and higher audit fees.

Originality/value

This study contributes to the determinants of audit fees and audit lag by analyzing the impact of an abnormal positive tone on audit engagement. The literature analyzing the determinants of audit engagement often focuses on the quality of non-textual information. This study analyzes the impact of the quality of textual information (measured by abnormal tone) on audit engagement, which provides evidence of the association between textual disclosure and audit.

Details

Managerial Auditing Journal, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 0268-6902

Keywords

Article
Publication date: 1 August 2016

Soo-Jung Jung, Bum-Joon Kim and Ju-Ryum Chung

This paper aims to examine how the relationship between abnormal audit fees and audit quality changed after adoption of the International Financial Reporting Standards…

2760

Abstract

Purpose

This paper aims to examine how the relationship between abnormal audit fees and audit quality changed after adoption of the International Financial Reporting Standards (IFRS) in Korea.

Design/methodology/approach

Using empirical data collected over the period from 2008 to 2013, this study analyzes the association between abnormally high/low audit fee and audit quality. This study uses linear regression to test the hypothetical relation using discretionary accrual as a proxy for audit quality.

Findings

This study finds that there exists no significant relationship between abnormally high audit fees and audit quality measured by the magnitude of discretionary accruals in the pre-IFRS adoption period. However, the relationship between abnormally high audit fees and the magnitude of discretionary accruals turns to be positive in the post-IFRS adoption period. These finding suggests that the IFRS enables some clients to engage more discretion in the choice of discretionary accruals and auditors charge higher audit fees in return for allowing the discretion for such clients.

Practical implications

This study provides insight to regulators of the need to review carefully the financial statements of firms with abnormally high audit fees, and to investors to be more cautious when using financial information about these firms.

Originality/value

To the best of authors’ knowledge, this is the first study to assess IFRS impact on audit fee-quality relation. Also, unique Korean audit market with intensifying competition and discounting audit fee provides interesting setting to review the impact of abnormal audit fee on audit quality.

Details

International Journal of Accounting and Information Management, vol. 24 no. 3
Type: Research Article
ISSN: 1834-7649

Keywords

Article
Publication date: 7 July 2020

Mahdi Salehi

The purpose of this study is to investigate whether the political connections of companies are correlated with auditor selection, audit fees and abnormal audit fees.

Abstract

Purpose

The purpose of this study is to investigate whether the political connections of companies are correlated with auditor selection, audit fees and abnormal audit fees.

Design/methodology/approach

The research data contains 756 observations of companies listed on the Tehran Stock Exchange during 2011-2019. In this study, the relationship between companies with political relationships and the selection of a qualified auditor, audit fees and abnormal audit fees are reviewed. The regression used for test the hypotheses.

Findings

The results of hypotheses testing indicate that there is a positive and significant correlation between the political relationships of companies and certified auditor selection, auditing fees and abnormal audit fees. In addition, the political relationships of companies have a significant and inverse effect on the relationship between institutional ownership and auditing fee and abnormal audit fees. It was also found that there is a positive and significant correlation between companies and political relationships and abnormal audit fees.

Originality/value

So far several studies conducted on audit fees, however, no study conducted on the relationship of political relationship of the companies with audit fees and the results of the current study may bridge the gap in the current field.

Details

Journal of Financial Crime, vol. 27 no. 4
Type: Research Article
ISSN: 1359-0790

Keywords

Article
Publication date: 18 September 2007

Rani Hoitash, Ariel Markelevich and Charles A. Barragato

The paper aims to examine the relation between fees paid to auditors and audit quality during the period of 2000‐2003.

23368

Abstract

Purpose

The paper aims to examine the relation between fees paid to auditors and audit quality during the period of 2000‐2003.

Design/methodology/approach

The paper constructs a measure of auditor profitability that is used as a proxy for auditor independence. The methodology is grounded in the notion that auditor independence is influenced by effort and risk‐adjusted fees, rather than the level of fees received from clients. Since, risk and effort are unobservable, the paper uses proxies based on client size, complexity and risk to estimate abnormal fees. Abnormal fees are derived using a fee estimation model drawn from prior literature. The paper employs two metrics to assess audit quality – the standard deviation of residuals from regressions relating current accruals to cash flows and the absolute value of performance‐adjusted discretionary accruals.

Findings

The paper documents a statistically significant negative association between total fees and both audit quality proxies over all years. These findings are robust to a variety of additional tests and several alternative design specifications. The results (pre‐ and post‐SOX) are consistent with economic bonding being a determinant of auditor behavior rather than auditor reputational concerns.

Research limitations/implications

The possibility that the empirical tests do not completely capture the impact of unobserved risk cannot be ruled out, though the paper attempts to do so by employing alternative specifications and sensitivity tests.

Practical implications

Policy makers should note that current restrictions on the provision of non‐audit services may not sufficiently resolve the issue of economic bonding and its impact on auditor independence.

Originality/value

In contrast to previous studies whose results are ambiguous, the paper finds a statistically significant positive association between several measures of total fees (it uses size‐adjusted and abnormal fees) and two metrics of accruals quality in all years (2000‐2003), consistent with economic bonding being a determinant of auditor behavior rather then auditor reputation concerns.

Details

Managerial Auditing Journal, vol. 22 no. 8
Type: Research Article
ISSN: 0268-6902

Keywords

Article
Publication date: 9 November 2015

Pedro Carmona, Alexandre Momparler and Carlos Lassala

The purpose of this paper is to explore whether the provision of non-audit services (NAS) by public accounting firms undermines audit quality. The study addresses this…

2370

Abstract

Purpose

The purpose of this paper is to explore whether the provision of non-audit services (NAS) by public accounting firms undermines audit quality. The study addresses this question by testing for an association between the provision of consulting services and auditor independence in listed companies.

Design/methodology/approach

The authors study if the magnitude of non-audit fees explains variations in earnings management by looking at the joint determination of non-audit fees, audit fees, and abnormal accruals using the SURE-regression estimation method.

Findings

Evidence from tested models suggests that audit services quality is uncompromised by the provision of NAS. In other words, high non-audit fees do not necessarily result in poor quality financial reporting.

Research limitations/implications

A different research methodology and a different sample (e.g. non-listed companies) may lead to differing results. As the paper analyses only one country, generalizability of the results might be a limitation. There is no need to increase legal restrictions on the provision of consulting services by public accounting firms in order to better safeguard audit quality.

Practical implications

Consulting clients may be more confident to hire both audit and NAS with the same firm and can make a case before the general Shareholders’ meeting. By providing both audit and NAS, consulting firms obtain knowledge spillovers and synergies while appealing highly qualified professionals.

Originality/value

The use of simultaneous equations (SURE-regression) to establish the auditor-client relation allows us to better model theoretical relations between audit fees, non-audit fees, and abnormal accruals. Likewise, joint modeling takes account of correlations between the error terms of the individual models, yielding more efficient estimates than ordinary least squares. Performing this analysis in a non-Anglo-American country with low litigation risk is also a valuable contribution to extant literature.

Details

Journal of Service Theory and Practice, vol. 25 no. 6
Type: Research Article
ISSN: 2055-6225

Keywords

Article
Publication date: 19 November 2021

Songsheng Chen, Jun Guo, Yingying Tian and Lijuan Yan

Using unique trade credit insurance data from China, we examine whether trade insurance claims are associated with audit efforts and audit quality.

Abstract

Purpose

Using unique trade credit insurance data from China, we examine whether trade insurance claims are associated with audit efforts and audit quality.

Design/methodology/approach

The paper is based on a sample of Chinese firms to study insurance claims of trade credit insurance that affects abnormal audit fees.

Findings

In this study, we find that firms with high insurance claims pay higher abnormal audit fees. Further, our findings indicate that firms with high insurance claims have a short audit report lag and tend to select local audit firms.

Originality/value

To the best of our knowledge, this is the first study to investigate the association between trade credit insurance claims and audit efforts. In addition, we contribute to the literature on the agency cost of abnormal audit fees.

Details

Asian Review of Accounting, vol. 30 no. 1
Type: Research Article
ISSN: 1321-7348

Keywords

Open Access
Article
Publication date: 14 September 2022

Chinedu Francis Egbunike, Ikponmwosa Michael Igbinovia, Kenebechukwu Jane Okafor and Lucy Cecilia Mmadubuobi

The study investigated the relationship between residual audit fee and real income smoothening, proxied as real operating cash flow and production expenditure smoothing of…

Abstract

Purpose

The study investigated the relationship between residual audit fee and real income smoothening, proxied as real operating cash flow and production expenditure smoothing of non-financial firms in Nigeria.

Design/methodology/approach

The study relied on secondary data from annual financial statements of 75 firms in the non-financial sector from 2010 to 2019. The study estimated the residual audit fee using a modified model from several contexts to suit the Nigerian environment. The hypotheses were tested using the dynamic panel GMM estimation procedure.

Findings

The results showed a significant negative effect of residual audit fee on (real) operating cash flow smoothing and production expenditure smoothing of non-financial firms. The control variables showed mixed effects for the industry-related (firm size and profitability), auditor attribute (audit quality and audit report lag) and the board related (board size and board independence).

Research limitations/implications

The firms included in the analysis were selected based on data availability from MachameRatios® and the occurrence of missing values for some of the variables used in the various estimation models may bias results.

Practical implications

The study identifies the nexus between RAF and real earnings management practices of non-financial firms; and shows the implication of fee payment to the overall conduct of the audit. More so, the mixed findings from the CVs suggest that in the context of developing economies, shareholders and capital markets regulators should be watchful of residual audit fees and utilise it as a gauge for audit quality and also an indicator of opportunism and weak internal control in the firm in the future assessments.

Social implications

The implication of the study stems from its relevance to the capital market stability and the potential negative disastrous effect of corporate failure from earnings management practices.

Originality/value

The study develops a newly residual audit fee model to explore the effect of RAF on real income smoothing rather than the widely used models from prior literature; secondly, the focus on real activities manipulation may present additional evidence that applies to developing countries rather the widely used accrual measurement technique from an economic bonding perspective.

Details

Asian Journal of Accounting Research, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 2443-4175

Keywords

1 – 10 of over 1000